This current debate over “tax extenders” is a sad illustration of why the system is such a mess.

Writing for Reason, Veronique de Rugy explains how special interests work the system.

Tax extenders are temporary and narrowly targeted tax provisions for individuals and businesses. Examples include the deductibility of mortgage-insurance premiums and tax credits for coal produced from reserves owned by Native American tribes. …These tax provisions were last authorized as part of the Bipartisan Budget Act of 2018, which retroactively extended them through the end of 2017, after which they have thus far been left to remain expired. If Congress indeed takes up extenders during the current lame-duck session, any extended provisions are likely to once again apply retroactively through the end of 2018, or perhaps longer. There are several problems with this approach to tax policy. Frequently allowing tax provisions to expire before retroactively reauthorizing them creates uncertainty that undermines any potential benefits from incentivizing particular behaviors.

To make matters more complicated, a few of the extenders are good policy because they seek to limit double taxation (a pervasive problem in the U.S. tax system).

…not all tax extenders are a problem. Some are meant to avoid or limit the double taxation of income that’s common in our tax code. Those extenders should be preserved. Yet others are straightforward giveaways to special interests. Those should be eliminated.

Veronique suggests a sensible approach.

It’s time for a new approach under which tax extenders are evaluated and debated on their individual merits. The emphasis should be on eliminating special-interest handouts or provisions that otherwise represent bad policy. Conversely, any and all worthy provisions should be made permanent features of the tax code. …The dire need to fix the federal budget, along with the dysfunctional effects from extenders, should provide the additional motivation needed to end this practice once and for all.

Needless to say, Washington is very resistant to sensible policies.

In part, that’s for the typical “public choice” reasons (i.e., special interests getting into bed with politicians to manipulate the system).

But the debate over extenders is even sleazier than that.

As Howard Gleckman explained for Forbes, lobbyists, politicians, and other insiders relish temporary provisions because they offer more than one bite at the shakedown apple.

If you are a lobbyist, this history represents scalps on your belt (and client fees in your pocket). If you are a member of Congress, it is the gift that keeps on giving—countless Washington reps and their clients attending endless fundraisers, all filling your campaign coffers, election after election. An indelible image: It is pre-dawn in September, 1986. House and Senate tax writers have just completed their work on the Tax Reform Act. A lobbyist friend sits forlornly in the corner of the majestic Ways & Means Committee hearing room. “What’s wrong,” I naively ask, “Did you lose some stuff?” Oh no, he replies, he got three client amendments in the bill. And that was the problem. After years of billable hours, his gravy train had abruptly derailed. The client got what it wanted. Permanently. And it no longer needed him. Few make that mistake now. Lawmakers, staffs, and lobbyists have figured out how to keep milking the cash cow. There are now five dozen temporary provisions, all of which need to be renewed every few years. To add to the drama, Congress often lets them expire so it can step in at the last minute to retroactively resurrect the seemingly lifeless subsidies.

In other words, the temporary nature of extenders is a feature, not a bug.

This is a perfect (albeit depressing) example of how the federal government is largely a racket. It enriches insiders (as I noted a few days ago) and the rest of us bear the cost.

P.S. I focused today on the perverse process, but I can’t help but single out the special tax break for electric vehicles, which unquestionably is one of the most egregious tax extenders.

EV tax credits…subsidize the wealthy at the expense of the lower and middle classes. Recent research by Dr. Wayne Winegarden of the Pacific Research Institute shows that 79 percent of EV tax credits were claimed by households with adjusted gross incomes greater than $100,000. Asking struggling Americans to subsidize the lifestyles of America’s wealthiest is perverse… Voters also shouldn’t be fooled by the promise of large environmental benefits. Modern internal combustion engines emit very little pollution compared to older models. Electric vehicles are also only as clean as the electricity that powers them, which in the United States primarily comes from fossil fuels.

I was hoping that provisions such as the EV tax credit would get wiped out as part of tax reform. Alas, it survived.

Though I view better compliance as a secondary benefit. My main goal is to have a tax system that doesn’t impose needlessly high levels of economic damage.

But let’s stick with the compliance issue. Writing for E21, Daniel Di Martino explains that the Italian government makes evasion and avoidance a preferable option because tax rates are too onerous.

Italy’s problem, similar to many of its southern-European neighbors, is an oppressively high tax burden, irresponsible welfare programs that encourage high measured unemployment and increase the debt, and high levels of regulation. …the share of average wages collected by the Italian government via income and social security taxes is among the highest in the OECD at 48 percent. In addition, Italy imposes a value-added tax of 22 percent on most goods and services, one of the highest in Europe. Plus, Italy’s corporate, capital gains, gift, and myriad other taxes are passed on to individuals and borne directly by workers. These high taxes lead to a growing shadow economy, where people underreport work to avoid paying taxes. …many estimates point to more than $175 billion (€150 billion) in lost tax revenue.

So what’s the best way of addressing that nation’s huge shadow economy?

Simple, less government.

Instead of cracking down on tax evasion and the shadow economy, Italy’s new government needs to rethink long-standing policies to bring a real economic recovery. Taxes need to be lowered so more businesses open and already-existing businesses and individuals come out of the shadows, broadening the tax base and raising revenue. This would allow those in the shadow economy to expand their businesses. Additionally, the welfare state should be trimmed so that people do not have an incentive to stay unemployed and young Italians are less burdened by government debt. Moreover, Italy needs to become more competitive by slashing the number of regulations.

The Institut Economique Molinari in Belgium took a look at the same issue, but included data for all European Union nations.

Economic reasoning and international experience point invariably to common causes that consistently create obstacles to dealings in the official economy: prohibitions, compulsory levies and specific tax measures, as well as fastidious and complex regulations. …As noted by two specialists, “In almost all studies, one of the most important causes (…) is the rise of the tax and social security burdens.” The higher these burdens on labour relations and dealings in the official economy, the less profitable these dealings become and the greater the incentive to trade on the black market. …As long as taxes account for a high share of the final price, opportunities for profit are provided in the underground economy, which moves in on a long‐term basis and comes to account for a significant share of countrywide sales. …Increasing this tax burden can only increase the disconnection between the real production cost of goods and their price on the official market, to such a degree that consumers begin abandoning the official market on a larger scale.

So what’s the answer?

Definitely not more government.

Given the scope of the underground economy, public authorities generally suggest toughening the means of repression so as to collect more tax revenues. The justification for this repression remains the same: it would promote the transfer of all under ground activity to the legal market, thereby creating new tax revenues. Beyond the cost of this repression in terms of resources and bureaucratisation of the economy, this reasoning and the resulting forecasts are erroneous. Though certain activities may no longer be undertaken in the underground economy, they will not be undertaken in the official economy either — in part or even in whole, depending on the specific case — because of the burden of compulsory levies and regulations. …Increased repression by the public authorities, without any change in regulatory and tax frameworks, risks simply destroying economic activities and the associated revenues. The only long‐lasting solution for ending the underground economy consists of dealing with the causes that give rise to it and thus to free the official market from its fiscal and regulatory burdens. …there is no other choice but to lighten tax and regulatory burdens.

Let’s now cross to this side of the Atlantic Ocean.

In an editorial about the current and former Treasury Secretary and their Cayman investments, the Wall Street Journal highlighted hypocrisy. But the best part was the conclusion about bad government policy driving money away from America.

Mr. Mnuchin served as director of Dune Capital, an investment firm he said he registered in the Caymans primarily to “accommodate nonprofits and pensions that want to invest through these off-shore entities.” By contrast, Mr. Lew was personallyinvested in the Citigroup Venture Capital International Growth Partnership II. You know, like that evil profiteer Mitt Romney, the subject of a now infamous Barack Obama campaign ad scoring Mr. Romney for profiting from money in offshore havens such as the Caymans. Mr. Lew’s Cayman company even used the same Ugland House building in the Caymans that President Obama so famously trashed as an “outrage” and “tax scam.” …The Democratic goal…seemed to be to get Mr. Mnuchin to admit that investors go to the Caymans to avoid American taxes. Mr. Mnuchin denied it but needn’t have been so shy. The Caymans have no corporate tax rate. The way to deal with the Caymans is not to punish investors who go there but to get rid of the regulations and high tax rates that send capital offshore.

But it’s not just market-friendly organizations that realize high tax burdens bolster the underground economy.

The International Monetary Fund released a study earlier this year on the shadow economy, which is defined as legal activities that are hidden from government.

The shadow economy includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. Monetary reasons include avoiding paying taxes and all social security contributions, regulatory reasons include avoiding governmental bureaucracy or the burden of regulatory framework, while institutional reasons include corruption law, the quality of political institutions and weak rule of law. For our study, the shadow economy reflects mostly legal economic and productive activities that, if recorded, would contribute to national GDP.

And what causes people to hide legal activity from government?

Here are some of the factors that drive the shadow economy according to the IMF.

In other words, people are less likely to comply when they have to endure bad government policy.

…in most cases trade openness, unemployment rate, GDP per capita, size of government, fiscal freedom and control of corruption are highly statistically significant.

And the number one bad government policy is high tax rates.

Let’s close by looking at the other side’s arguments.

Earlier this month, I revealed that the OECD finally admitted that it’s anti-tax competition project was motivated by a desire for class warfare and bigger government.

That’s terrible policy, but I give the bureaucrats in Paris credit for finally being honest.

By contrast, I’m not sure what to say about the bureaucrats in Brussels. The European Commission’s idea of an argument is this vapid video, which attempts to convince viewers that 20 percent of what they like is missing because government isn’t collecting more tax revenue.

In reality, of course, the money isn’t “missing.” It’s still in the private sector, where it actually is providing things that people like, rather than financing the stuff politicians like.

P.S. Speaking of vapid arguments from the European Commission, the bureaucrats actually created an online game designed to brainwash kids into supporting higher tax burdens.

P.P.P.S. I’m still mystified that Republicans continue to send our tax dollars to Paris to subsidize the OECD. Actually, I’m not mystified. This is actually a good example of why they’re called the Stupid Party.

I’ve been at the United Nations this week for both the 14th Session of the Committee of Experts on International Cooperation in Tax Matters as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters.

As you might suspect, it would be an understatement to say this puts me in the belly of the beast (for the second time!). Sort of a modern-day version of Daniel in the Lion’s Den.

These meetings are comprised of tax collectors from various nations, along with U.N. officials who – like their tax-free counterparts at other international bureaucracies – don’t have to comply with the tax laws of those countries.

In other words, there’s nobody on the side of taxpayers and the private sector (I’m merely an observer representing “civil society”).

I could share with you the details of the discussion, but 99 percent of the discussion was boring and arcane. So instead I’ll touch on two big-picture observations.

What the United Nations gets wrong: The bureaucracy assumes that higher taxes are a recipe for economic growth and development.

I’m not joking. I wrote last year about how many of the international bureaucracies are blindly asserting that higher taxes are pro-growth because government supposedly will productively “invest” any additional revenue. And this reflexive agitation for higher fiscal burdens has been very prevalent this week in New York City. It’s unclear whether participants actually believe their own rhetoric. I’ve shared with some of the folks the empirical data showing the western world became rich in the 1800s when fiscal burdens were very modest. But I’m not expecting any miraculous breakthroughs in economic understanding.

What the United Nations fails to get right: The bureaucracy does not appreciate that low rates are the best way of boosting tax compliance.

Most of the discussions focused on how tax laws, tax treaties, and tax agreements can and should be altered to extract more money from the business community. Participants occasionally groused about tax evasion, but the real focus was on ways to curtail tax avoidance. This is noteworthy because it confirms my point that the anti-tax competition work of international bureaucracies is guided by a desire to collect more revenue rather than to improve enforcement of existing law. But I raise this issue because of a sin of omission. At no point did any of the participants acknowledge that there’s a wealth of empirical evidence showing that low tax rates are the most effective way of encouraging tax compliance.

I realize that these observations are probably not a big shock. So in hopes of saying something worthwhile, I’ll close with a few additional observations

I had no idea that people could spend so much time discussing the technicalities of taxes on international shipping. I resisted the temptation to puncture my eardrums with an ice pick.

From the moment it was announced, I warned that the OECD’s project on base erosion and profit shifting (BEPS) was designed to extract more money from the business community. The meeting convinced me that my original fears were – if possible – understated.

A not-so-subtle undercurrent in the meeting is that governments of rich nations, when there are squabbles over who gets to pillage taxpayers, are perfectly happy to stiff-arm governments from poor nations.

The representative from the U.S. government never expressed any pro-taxpayer or pro-growth sentiments, but he did express some opposition to the notion that profits of multinationals could be divvied up based on the level of GDP in various nations. I hope that meant opposition to “formula apportionment.”

Much of the discussion revolved around the taxation of multinational companies, but I was still nonetheless surprised that there was no discussion of the U.S. position as a very attractive tax haven.

The left’s goal (at least for statists from the developing world) is for the United Nations to have greater power over national tax policies, which does put the UN in conflict with the OECD, which wants to turn a multilateral convention into a pseudo-International Tax Organization.

The Foreign Account Tax Compliance Act (FATCA) is an odious law enacted back in 2010 when the left controlled all the levers of power. It’s horrible legislation that threatens the rest of the world with financial protectionism (a 30 percent levy on all money flowing out of the United States) unless foreign governments and foreign financial institutions agree to serve as deputy tax collectors for America’s anti-competitive worldwide tax system.

I guess time will tell, but if the goal is good policy (and keeping promises), this law deserves to be tossed in the trash.

I’ve previously explained that FATCA is so brutal that it has led many overseas Americans to give up their citizenship simply because FATCA made their lives miserable. They couldn’t open bank accounts. They had trouble finding places to manage their investments. Even retirement accounts became a nightmare.

Some people said that these difficulties were just temporary and would disappear once everyone learned how the law operated.

Hardly. Let’s start with some data from a Bloomberg story that should be a wake-up call for the crowd in Washington.

The number of Americans renouncing their citizenship rose to a new record of 5,411 last year, up 26 percent from 2015, according to the latest government data. …Since Fatca came into being, annual totals for Americans renouncing citizenship have reached their four highest historic levels.

…the Foreign Account Tax Compliance Act (Fatca) became law in 2010 to go after fat cats stashing money abroad, these pages have reported that it has led the IRS to treat law-abiding Americans as criminals. …Under Fatca, Americans must now report overseas holdings of more than $50,000 even if they owe no taxes, or else face crushing fines. For foreign financial institutions, the penalty for not giving the IRS what it wants to know about their American clients is a 30% withholding penalty on any U.S.-sourced payment to these institutions. …With the GOP controlling Congress and White House, the time is ripe for Republicans to make good on their pledge and give Fatca the heave-ho.

Amazingly, even the “taxpayer advocate” at the IRS recognizes the law is a disgrace, reversing the presumption of innocence in the Constitution.

The IRS has adopted an enforcement-oriented regime with respect to international taxpayers. Its operative assumption appears to be that all such taxpayers should be suspected of fraudulent activity, unless proven otherwise.

This is a remarkable development. I’ve groused before that the IRS’s taxpayer advocate has a bad habit of advocating for the IRS rather than the American people, so FATCA must be really bad to generate a report that actually defends the rights of taxpayers.

It’s also bad news for financial institutions.

An article in the Economist has some very remarkable admissions, including the fact that compliance costs will be at least twice as high as the tax revenue that ostensibly is being generated.

FATCA’s intrusiveness has caused concern among banks and fund managers. It raises big questions about data privacy. Compliance costs, mostly borne overseas, are likely to be at least double the revenue that the law will generate for America. The necessary overhauls of systems and procedures and the extra digging around to identify American clients could add $100m or more to a large bank’s administrative costs. No wonder bankers have dubbed FATCA the Fear And Total Confusion Act. An OECD tax official describes the law as “awful, in a way, like a nuclear bomb” but also sees it as “a remarkable leap forward for transparency”. …A further concern is the risk of misuse of information by corrupt administrations, or rogue government employees, such as the sale of personal financial data to would-be kidnappers.

Let’s now focus on how the law is an attack on the sovereignty of other nations (and how it creates a precedent that will be used to attack America’s fiscal sovereignty).

Some leftists justify this wretched law by saying it only targets so-called tax havens. But Trinidad and Tobago is hardly in that category. Yet because FATCA applies to the entire world, a senior official in that country very much hopes Trump will follow through on promises in the Republican platform to repeal the misguided legislation.

Kamla Persad-Bissessar, the leader of the opposition coalition in parliament, recently…discovered that the GOP had called for repeal of the Foreign Account Tax Compliance Act, or Fatca, which is best understood as a license for IRS imperialism. …Mrs. Persad-Bissessar wrote Donald Trump in January asking if he will keep this promise. …Mrs. Persad-Bissessar, a former prime minister, wants to know because the Trinidad and Tobago parliament is now considering changing the nation’s laws to accommodate Fatca.

Repeal would be good for T&T, but it also would be good for the USA.

Americans have an even bigger stake in the answer. …the law has become another example of gross federal overreach, adding another burden on Americans overseas who are already paying taxes where they live. The 2010 law has almost no parallel anywhere, for good reason. While most nations limit their taxes to income earned within their borders, the U.S. is among the smaller group of nations that taxes its citizens on global income. …The roughly eight million Americans working overseas have been hit hardest by this bad law. Some foreign banks and financial institutions have responded simply by refusing to take American customers, on grounds that Fatca requirements are more trouble than the business is worth. For similar reasons others do not want Americans as business partners. Many others of modest means who owe no U.S. taxes can still find themselves hit by hefty fines and penalties because they have fallen afoul of the reporting requirements.

Heck, even if the law isn’t repealed, Trump can defang it.

…the whole Fatca edifice has been built on the intergovernmental agreements that Treasury has negotiated with more than 100 countries—agreements for which there is no statutory authority or Congressional ratification. Mr. Trump could take the teeth out of Fatca by announcing he has suspended negotiations for future agreements and won’t enforce the ones we have. …Let’s hope President Trump gives the answer that Americans deserve, by making clear he intends to deliver on the GOP pledge to dismantle a bad law that never should have been passed.

Amen.

The law is also running into problems in Israel, another nation that hardly fits the “tax haven” definition. A Forbes columnist has a dismal assessment of this intrusive and destructive law.

…the Israeli High Court’s temporary injunction against the enforcement of America’s controversial global tax law FATCA should serve as “a wake-up call” for other nations to rethink enforcing this “toxic, flawed and imperialistic legislation,” according to the boss of a leading independent financial firm that advises high-net-worth individuals (HNWI’s) and expats globally. …“Justice Meltzer’s action should be championed,” deVere’s Green asserts, who is an outspoken critic of FATCA. “His wise caution should serve as a wake-up call for other countries to rethink enforcing this toxic, flawed, damaging legislation that is being imposed on sovereign states around the world by the U.S.” …FATCA could indeed be described as a “masterclass” in fiscal imperialism and unintended consequences. But also of concern is that the US is increasingly secret in matters of financial data. It’s no wonder some have labelled it “horrific” and a nightmare for financial institutions. …Perhaps unsurprisingly there a growing trend and an overwhelming number of U.S. citizens are giving up their American citizenship (citizenship abdications), which has been revealed by the U.S. Treasury Department. And, according to a survey conducted in early 2015 by deVere itself almost three quarters (73%) of Americans living overseas expressed the view that they were tempted to relinquish their U.S. passports.

Canada also is unhappy that the U.S. is engaging in an extraterritorial revenue grab.

Some 7m Americans outside the country (1m of them in Canada), along with an unknown number of “US persons”, are now caught in FATCA’s net. …Ms Hillis is fighting back through the courts. She and Gwen Deegan, an artist who has lived in Canada since she was five, filed a suit claiming that the Canadian government’s co-operation with FATCA violates a tax treaty and constitutional protections against discrimination. …If Ms Hillis and Ms Deegan win in court, Canada’s government will face an awkward choice between complying with the decision and exposing Canadian banks to huge penalties. The Alliance for the Defence of Canadian Sovereignty, which is paying the women’s legal expenses, has harvested donations from China, Vatican City and beyond.

With an estimated 9 million Americans currently living overseas, the U.S expatriate community is comprised of a wide variety of people from all walks of life. ..The one nagging truth that is both common and unique to all of these individuals? They remain effectively fettered to the U.S. tax system. Unlike almost every other tax regime in the world, the U.S. taxes its citizens no matter where they reside. Thus, even if you expect never to return, you should expect to have to file an annual tax return. …As many expats can attest, it has become more difficult to open or maintain a bank account overseas without having to sign an IRS Form W-9 or other U.S. tax-related documentation. This increasingly common bank procedure is a result of the Foreign Account Tax Compliance Act, which requires foreign banks and other financial institutions, among other things, to gather and report information to the IRS about their U.S. customers or face stiff tax-withholding penalties on U.S. investments.

The last sentence is that excerpt deserves some attention. The FATCA law is so onerous that it is advantageous for many to simply not invest in the American economy.

And that means less growth and prosperity for the rest of us.

But that’s just part of the story.

Because the United States has imposed this awful law on the rest of the world, other nations now want to do the same thing. Indeed, the tax-aholics at the OECD have modified a Multilateral Convention and turned it into an Orwellian regime for promiscuous collection and sharing of data by almost every government. This scheme, sometimes referred to as the Global Account Tax Compliance Act because of its similarity to FATCA (I call it a nascent World Tax Organization), will boomerang on America because of the presumption that we’re obliged to change our tax and privacy laws so that foreign governments can tax investments in the United States.

The War against Cash is a battle that shouldn’t even exist. But politicians don’t like cash because it’s hard to control something that people can freely trade back and forth. So folks on the left are arguing that governments should ban or restrict paper money.

In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.

In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.

In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.

In Part IV, a few months ago, there was additional discussion of the dangers that would be unleashed if politicians banned cash.

Now let’s add a fifth installment in this series, and we’ll focus on the destructive turmoil resulting from India’s decision earlier this month to ban “large” notes.

India unexpectedly scrapped all larger-denomination banknotes overnight… Prime Minister Narendra Modi said 500 and 1,000 rupee notes — worth around $7.50 and $15, respectively — would cease to be legal tender from midnight on Tuesday. The announcement stunned Indians, who were given four hours’ notice that much of their cash would be “mere paper”. RBI data suggests that the Rs500 and Rs1,000 notes account for 86 per cent of the value of all cash in circulation in India at present. …The shock move is the latest step by Mr Modi’s administration to crack down on the vast shadow economy, which remains beyond the reach of India’s tax authorities.

Before delving into why this is an unfortunate development, I can’t resist pointing out that banknotes worth $7.50 and $15 are neither large nor inappropriate for an economy at India’s level of development.

When the United States had a similar level of per-capita GDP (back in the late 1800s), there were $500 and $1000 notes. Yet America didn’t have serious problems with corruption and tax evasion. So why should the existence of far smaller bills be a problem in India today?

I’ll return to that question in the conclusion, but let’s first look at the impact of Prime Minister Modi’s unilateral attack on currency. A column in the New York Times explains why the policy does more harm than good.

On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. …In the two weeks after the measure was announced, millions of Indians stricken with small panic rushed out to banks; A.T.M.s and tellers soon ran dry. Some 98 percent of all transactions in India, measured by volume, are conducted in cash. …So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come.

The ripple effect of the policy is large and unpleasant.

…demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy. …Anyone seeking to convert more than 250,000 rupees (about $3,650) must explain why they hold so much cash, or failing that, must pay a penalty. The requirement has already spawned a new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. Demonetization is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewelry and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach.

As is so often the case, the bogeyman of terrorism is being used as a rationale for bad policy, even though everyone realizes that terrorists won’t be affected.

When the government announced demonetization, it also justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes… Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation.

I’m sympathetic, by the way, to the notion that the government should fight counterfeiting. Crooks printing up fake notes is even worse than central banks printing up too many real notes.

In any event, this indirect attack on the shadow economy imposes considerable costs on regular Indians.

In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living.

India is conducting a big test of the idea that getting rid of cash can help address crime and corruption. Unfortunately, it might achieve nothing more than a lot of inconvenience. Criminals and corrupt officials often conduct business in cash, because it’s hard to trace. So in a sense it’s logical to assume that abolishing cash will help reduce criminal activity. …This rationale has led Indian Prime Minister Narendra Modi to declare a surprise cancellation of the nation’s two highest-denomination notes, effectively invalidating 86 percent of total currency in circulation. Anyone with outstanding notes must either deposit them in a bank — potentially incurring a tax — or exchange them for replacements in strictly limited sums.

Ms. Ou explains that the policy will be traumatic for the hundreds of millions of Indians who don’t have bank accounts.

In a country where most transactions are conducted in cash, many people have been unable to pay for necessities like food or medical services. Banks have had to work overtime to handle the exchange, bringing other financial services to a halt. It’s certainly likely that the sheer trauma will leave people less keen to hoard rupees, creating a big incentive to move economic activity out of cash and into banks. Except that a huge number of Indians don’t have a bank account.

In any event, she points out, banning cash won’t have much impact on corruption since politicians and public officials have plenty of ways to extort wealth from the productive sector.

…the prevalence of cash is far from a foolproof indicator of criminality and corruption. Consider Nigeria, which is perceived as one the world’s most corrupt countries and has a currency-to-GDP ratio even lower than Sweden’s… Nigerians have abandoned cash because they have so little trust in government-issued currency. Instead of using banks, they tend to transact in mobile airtime minutes. …Those with more substantial wealth put it in foreign currency. By undermining faith in its cash notes, India may go the way of Nigeria. Villagers are already resorting to barter. …corrupt public officials were believed to have their wealth in real estate and gold.

A news report highlights the real-world impact of the Indian government’s bad policy. Starting with the impact on a poor single mother.

With demonetisation, Sayyed’s family has been forced to cut costs across the board to make sure their limited cash resources don’t get exhausted faster than the banks can exchange money. “Last week it took me four hours of waiting in line to get my old notes exchanged,” said Sayyed. “And because no one had change for a Rs 2,000 note, I had to buy ration on credit for six whole days.” Vegetables and foodgrains, says Sayyed, have grown more expensive in the past 10 days, because of the impact of demonetisation on wholesalers and retailers.

And the impact on a small-business owner.

His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. …How is he coping with this liquidity crunch? Not by going cashless. In part because he doesn’t have a bank account. “I tried to open one but they wanted too many proofs of identity,” Sharma said.

By the way, Sharma is a victim of pointless anti-money laundering laws, something even the World Bank recognizes as being particularly harmful for the poor.

A farmer also has been hit hard.

It has been three weeks since Vedagiri’s single acre of land had been tilled and paddy seedlings had been sown. …“The cooperative bank cannot lend us money now, so for the whole of last week, our crop has been standing without pesticides,” said Vedagiri. Several times last week, Vedagiri and the other farmers of Royalpattu were turned away by bank employees. New currency notes have been slow to reach most rural cooperative banks across India. While sowing the crop, Vedagiri had employed 20 labourers. But he has been unable to pay any of them since he had not still received the rest of the money…Vedagiri does not know how he will get through this cropping season without incurring a loss.

Bloombergreports on some of the bizarre unintended consequences of this bad policy.

Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation. …Here are some unintended consequences. Indian defense jets are on standby to airlift cash from mints across India to remote corners of the country. …wealthy Indians rushed to make costly purchases with unaccounted cash. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place. Demand matched what the shop would usually sell in a month and the store had to turn away customers… A new gold rush also emerged soon after Modi’s announcement. “Jewelers who had shut shop for the day on Nov. 8 had to reopen their stores within a couple of hours and were selling gold up to 4 a.m.,” Chirag Thakkar, a director at gold wholesaler Amrapali Group, said by phone… Customers paid as much as 52,000 rupees per 10 grams, almost double the current prices, he said. …About half of an estimated 9.3 million trucks under the All India Motor Transport Congress were off the road eight days after the announcement as drivers abandoned vehicles mid-way into their trips after running out of cash, according to Naveen Gupta, secretary general of the group. India’s roads carry about 65 percent of the country’s freight. Drivers don’t have enough money for food, truck maintenance and to make payments at border check posts. …Compounding the problem of pumping new money into the system is the need to reconfigure the country’s 220,000 cash machines so that they can dispense the new 500 and 2,000 rupee notes, which do not fit into existing ATM cash trays.

To be fair, some of these costs are transitory in nature, so it’s important to distinguish between those consequences and others that might linger.

Though the part of this story that doesn’t make sense is that the government plans on issuing new high-value banknotes. So the Prime Minister is not actually banning large banknotes (or even all non-digital currency), which is the usual goal of the war-on-cash crowd.

So why did the Modi cause so much turmoil with an overnight ban rather than allow for an orderly transition? I’m assuming that the answer has something to do with inconveniencing those with large cash holdings, some of whom will be crooks or counterfeiters or corrupt public officials.

As already noted, the battle against counterfeit currency surely is worthwhile.

But I have considerable doubts about whether this currency swap will have much impact on the shadow economy or public corruption.

And that brings me back to the rhetorical question I posed early in this column about why the United States didn’t have massive problems with crime and public corruption back in the late 1800s (when our per-capita GDP was akin to India’s today according to the Maddison data), even though we had banknotes that were far more valuable ($500 and $1000 compared to $7.50 and $15).

And since people weren’t penalized for earning money and creating wealth, there was no incentive to be part of the shadow economy. And since government was small, there weren’t that many favors to distribute, so there wasn’t much need to bribe politicians or bureaucrats.

If Prime Minister Modi wants a vibrant, above-ground economy with minimal corruption, maybe that’s the path he should follow.

Let’s close with a very sage warning from Richard Fernandez’s column in PJ Media.

Money in its various forms has become the new battleground between a State that needs to reward its constituencies with and the actual economy which produces most of the real goods and services required to do it. The sad experience of command economies suggests in end the Real always wins over the Official. As Ramesh Thakur said of India’s demonitization policy: “a better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.”

And my favorite Russian-Irish-Californian economist also has a very apt summary of this issue.

Governments killing off cash transactions is a catchy trend. Liberty & privacy being killed off for the sake of State control. https://t.co/VCY9lCQtk6

Today, let’s look at Donald Trump’s plan to increase the cost of childcare. And this is a very easy column to write because the economic consequences of Trump’s plan to make childcare expenses deductible are the same as Hillary’s misguided plan to subsidize tuition.

Let’s start with a caveat. We don’t know a lot about Trump’s new scheme. All we know is that he said in his big speech to the Economic Club of Detroit earlier today that “My plan will also help reduce the cost of childcare by allowing parents to fully deduct the average cost of childcare spending from their taxes.”

From an economic perspective, Trump’s statement doesn’t make sense. At best, creating a big deduction for childcare expenses simply creates the illusion of lower cost because of the tax loophole.

But that’s the best-case scenario. The actual result will be to increase costs and make the tax code even more convoluted.

Creating a new distortion in the tax code also will have a discriminatory impact. The tax loophole will only have value for parents who use outside care for their kids. Parents who care for their own kids get nothing. Moreover, the new loophole also won’t have any value for the millions of people who don’t earn enough to have any tax liability. Yet these people will be hurt when childcare providers increase their prices to capture the value of the deduction for parents with higher levels of income.

And that will probably lead politicians to make the tax loophole “refundable,” which is a wonky way of saying that people with low levels of income will get handouts from the government (in other words, “refundable” tax breaks are actually government spending laundered through the tax code, just like much of the EITC).

So we’d almost certainly be looking at a typical example of Mitchell’s Law, where one bad policy leads to another bad policy.

And when the dust settles, government is bigger, the tax code is more convoluted, and the visible foot of government crowds out another slice of the invisible hand of the market.

I want fewer favors in the tax code, not more. I want rationality to guide economic decisions, not distorting tax preferences. Most of all, I don’t want politicians to have more power over the economy. I wish Trump listened to Ben Carson when putting together a tax plan.

But even that’s not sufficient. There’s another very big part of the tax burden, which is the complexity caused by a 75,000-page tax code that imposes very high compliance costs on taxpayers. In other words, the tax (as measured by time, resources, and energy) we pay for the ostensible privilege of paying taxes.

And this compliance tax is enormous according to new research from the Tax Foundation. The report starts with some very sobering numbers.

…In 1955, the Internal Revenue Code stood at 409,000 words. Since then, it has grown to a total of 2.4 million words: almost six times as long as it was in 1955 and almost twice as long as in 1985. However, the tax statutes passed by Congress are only the tip of the iceberg when it comes to tax complexity. There are roughly 7.7 million words of tax regulations, promulgated by the IRS over the last century, which clarify how the U.S. tax statutes work in practice. On top of that, there are almost 60,000 pages of tax-related case law, which are indispensable for accountants and tax lawyers trying to figure out how much their clients actually owe.

It then measures the burden of this convoluted system for taxpayers.

According to the latest estimates from the Office of Information and Regulatory Affairs, Americans will spend more than 8.9 billion hours complying with IRS tax filing requirements in 2016. This is equal to nearly 4.3 million full-time workers doing nothing but tax return paperwork. …in dollar terms, the 8.9 billion hours needed to comply with the tax code computes to $409 billion each year in lost productivity, or greater than the gross product of 36 states… The cost of complying with U.S. business income taxes accounts for 36 percent of the total cost of the entire tax code, at $147 billion. Complying with the individual income tax costs another $99 billion annually.

The report provides data for 50 provisions of the tax code. In the interest of brevity, here are the 10-most expensive features of the internal revenue code.

The overall $147 billion compliance cost for businesses is enormous, particularly when you consider that corporate tax revenue for Uncle Sam this year is estimated to be $329 billion. So companies have a double-whammy of enduring the developed world’s highest corporate tax rate, and they have to spend lots of money for the pleasure of that punitive system.

Another part that grabbed my attention is “Form 4562” dealing with depreciation. If you care about good policy and stronger growth, businesses shouldn’t even have to depreciate. Instead, we should have a policy of “expensing,” which is simply the common-sense approach of recognizing costs in the year they occur. So firms are paying a $23 billion-plus tax for the privilege of a policy that already punishes them for investing. Amazing.

And don’t forget the death tax, which also makes the top-10 list. The Tax Foundation points out that the compliance cost basically doubles the burden of that horrible and unfair levy.

The estate and gift tax, which will only collect approximately $20 billion in federal revenues this year, has a compliance cost of $19.6 billion.